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Private equity firms raise funds (usually have a 10yr investment horizon) and use these funds to serve as the equity tranche for a buyout that the remainder is
by whatok 6y ago
Private equity firms raise funds (usually have a 10yr investment horizon) and use these funds to serve as the equity tranche for a buyout that the remainder is financed with debt. Banks (or other investment firms sometimes nowadays) will provide financing for these buyouts and that financing is later refinanced with syndicated financing through loans or bonds.
There are a decent amount of banks that were in the middle of this process, covid hit, and they are now stuck with those loans on their books.
- black_puppydog 6y agoin other words, yes, it is created "out of nothing" (when handing out the loans) and once the "unexpected bad things" happen it becomes "real" (as in it is on the books and will now have to be accounted for properly)?
- whatok 6y agoI'm not a fan of private equity but I'm also not a fan of rants directed my way when I'm answering a question someone asked. Please take this somewhere else.
- black_puppydog 6y agosorry if this came across as directed at you somehow. you seemed to have a more detailed understanding of the moving parts, so I figured I could throw a super simplified version of my understanding at you and see if it is a valid simplification or an invalid one. I'll interpret your answer as "invalid" for now. :)
- whatok 6y agoNo, it's not from thin air. Bridge financing is from cash on a bank's balance sheet (or as mentioned above, sometimes non-bank entities). Banks usually participate in bridge financing (some fees, loan on balance sheet typically on a short-term basis) because they want to also be part of syndicate financing (more fees, previous loan syndicated out to investors). Banks infrequently get "hung" with loans and these usually are just bad deals that somehow got through. There are more hung loans now on deals that might have been okay under normal economic circumstances but are not feasible right now.
- worik 6y agoSo will we bail out the banks and their shareholders this time?
- whatok 6y agoIf this question is in reference to the hung loans I mentioned in my previous post, there won't be a need to; at least on those. This is small portion of overall bank business and banks are in much better shape than over a decade ago.
- pkaye 6y agoSo who actually loses money in the end? Edit: Or is this one of the outliers and most of the other times all the participants make money?
- johnvanommen 6y agoPension funds will be getting beat up by a lot of these. For instance, 24 hour fitness is on the verge of failing, and it's owned by a pension fund in Canada. https://www.24hourfitness.com/company/press_room/press_releases/2014/20140530.html https://www.24hourfitness.com/company/press_room/press_relea... "24 Hour Fitness USA, Inc. announced that AEA Investors, a leader in the private equity industry; Ontario Teachers’ Pension Plan, Canada's largest single-profession pension plan – and one of the world’s largest; and Fitness Capital Partners, a fund organized by Dean Bradley Osborne and Global Leisure Partners have completed their acquisition of the Company from Forstmann Little & Co."